All 50 state attorneys general and multiple federal agencies had
joined forces last year to hammer out a pact with big mortgage
servicers. Among the terms under discussion was making banks
reduce struggling
homeowners’ mortgage principal, accept loan-servicing
standards, and pay financial penalties for “robo-signing” and
related foreclosure abuses.

That looks to be dead. Instead, the Federal
Reserve, Office of the Comptroller of the
Currency, FDIC and other bank
regulators have started signing individual “consent agreements”
with Bank of America (BAC), Wells
Fargo (WFC) and other large servicers.

Legal experts who have reviewed the government’s agreement (which
you can
review here) describe it as exceptionally weak. Banks aren’t
forced to
cut loan balances or pay a fine. They also don’t have to
admit any wrongdoing in connection with the robo-signing scandal.
Rather, banks are simply required to tighten their internal loan
modification and foreclosure processes. Said Georgetown
University law professor Adam Levitin,
a noted housing finance expert:

The bank regulators are going to provide cover for the banks by
pretending to discipline them very hard, but not really doing
anything. The public will see a stern [cease-and-desist] order,
but there won’t be any action beyond that. It’s as if the
regulators are saying so all the neighbors can hear, “Banky,
you’ve been a bad boy! Come inside the house right now because
I’m going to give you a spanking!” And then once the door to the
house closes, the instead of a spanking, there’s a snuggle. But
the neighbors are none the wiser.

Feds to states: You’re on your own

The agreement does require loan servicers to hire independent
consultants to examine some foreclosures that occurred between
2009 and 2010. But it doesn’t specify what foreclosures are
eligible for review, meaning that is left up to servicers. It
also puts few limits on the third-parties banks may hire to
conduct these reviews. Presumably, such experts won’t be paid
based on how many foreclosures they red-flag.

Iowa Attorney General Thomas Miller, who has led
the states’ robo-signing investigation, told Bloomberg
he’s “disappointed” that the feds are going their own way. He
should be. By laying down such minimal requirements and forgoing
all punishment, the consent agreement removes whatever
negotiating leverage the states may have had. Any real help for
homeowners or serious punishment for financial firms is off the
table.

The banks will resist further pressure to offer mortgage relief
by pointing to the settlement with bank regulators. The AGs, some
of whom had begun to think twice about pushing for a strong
agreement, must now decide whether to effectively sign on to the
federal agreement or pursue action on their own. Given the
obstacles in fighting Wall Street and Uncle Sam, most will
relent.

What the robo-signing scandal is really about

No doubt some people will continue to dismiss the robo-signing
fiasco as one big clerical error by the financial industry. They
will argue that ramrodding illegal foreclosures through the
courts is justified by the need to stabilize the housing market.
They will say that losing your home is proof-positive of reckless
borrowing. And they will claim that helping
some struggling homeowners is unfair to those who, by luck,
circumstance or hard work, managed to stay out of trouble.

But let’s remember what’s at stake here. This isn’t only about
preventing
unnecessary foreclosures, although as an ethical and economic
matter that’s critical. In a larger sense it’s about preserving
the rule of law.

Robo-signing isn’t some kind of administrative misdemeanor. It
amounts to a massive case of fraud and willful obstruction of
justice. Legal documents were forged. Banks wrongly, deliberately
kicked numerous homeowners to the curb. People were royally
screwed. This is about some of this country’s most powerful
institutions deciding to play by their own rules.